TRADE AND PROSPERITY: A CASE STUDY OF BANGALORE, SILICON VALLEY OF INDIA
By DR.S.SHAJAHAN, ICFAI BUSINESS SCHOOL, BANGALORE
E-mail: , contact: +919886415268
INTRODUCTION
“India is rapidly emerging as a country of global importance and we are seeing its foot print across the world new in new and exciting ways “
PAUL WOLFOWITZ, PRESIDENT WORLD BANK **
Indian fever is spearheading in the world’s investment community but IMF’s trade restrictiveness index for India is 8 out of 10. India’s foreign trade at US$235 billion in 2004 increased by an impressive 8% over 2003. As a share of GDP foreign trade has grown to 34% in 2004 from 16% in 1995. Services accounted for one-third of India’s exports and IT services at US$17 billion were the largest export earner. India jumps 5 notches in services exports ranking of WTO to 16 th position up from 21 and exports stood $39.6 billion and improved market share to1.9 per cent in 2004.
As we know, the post-war era had already witnessed economic miracles in Japan and South Korea. But neither was populous enough to power worldwide growth or change the game in a complete spectrum of industries. China and India, by contrast, possess the weight and dynamism to transform the 21st-century global economy. The closest parallel to their emergence is the saga of 19th-century America, a huge continental economy with a young, driven workforce that grabbed the lead in agriculture, apparel, and the high technologies of the era, such as steam engines, the telegraph, and electric lights.
Further, China and India are among the fastest growing in terms of the number of patents won from the United States Patent and Trademark Office (USPTO). Chinese mainland recorded the highest growth of 41.4% in patents won in 2004, compared with the 1999 figures while India showed a 210% growth over the same period. Singapore recorded the second best growth rate of 230%.China and India are the fastest growing economies in the world, according to the GDP growth rate figures released by UNCTAD in 2005 and there is another bit of evidence supporting that story.
------
** Source: Economic Times, October 15, 2005 and The McKinsey Quarterly, Indian economy updates, October 2005
The present import led growth poised many problems for the Indian policy makers. Indian manufacturing industry contributed only 15 % of GDP since 1990s but their export growth is exceeding 20% on a year to year basis since 2000. Further CAGR of manufacturing is only 5.5 during 1990-2003 and it employed 12% of work force. The sun rise industry for India, service sector employed 21% of the work force and registered CAGR of 6.9% during the same period. Agriculture sector employed 67% of the work force grew marginally and recorded CAGR of 2.9% during 1990-2003.Contribution of service in India’s GDP has grew from 43% in 1990 to 57% in 2004.FDI is linking the country’s growth in service sector in a big way. In 2004 India attracted US $ 5.4 billion as against US$ 4.2 billion in 2003 and net capital inflow recorded US$32,500 million in 2004 up from US$ 26,500 million in 2003.
1.0 FDI AS ENGINE FOR GROWTH
We recognize the globalization offers us enormous opportunities in the race to leapfrog in developmental process
DR.MANMOHAN SINGH, PRIME MINISTER OF INDIA **
One of the key factors influencing economic development of a country like India is investment. Larger the investment, higher can be the rate of economic growth. Most of the developing countries like India have investment requirement greater than the domestic savings. This gap can be filled by foreign capital inflow. Therefore, foreign capital can increase the investment capability of a country In the world increasingly characterised by liberalization and globalization, firms are looking for places to invest that offer specific advantages or “created assets”, including communications infrastructure marketing networks, and intangibles such as attitudes to wealth creation and business culture, innovative capacity, the stock of information trademarks, and goodwill. These factors have become critical for firms’ competitiveness and can make countries without more traditional advantage attractive locations for FDI. .
According to world investment report 2005, a more liberal investment regime led to a 25% in India’s FDI inflow during 2004 interestingly outward FDI flow from India is higher at US$ 2.22 billion compared to US$1.80 billion by Chinese companies in 2004
Foreign investment - both direct and portfolio - rose to an all-time high during 2003-04, amounting to 2.7 per cent of GDP and 24.8 per cent of merchandise exports. However due to slow down in the reform process the corresponding figures m during 2004-05 as estimated by RBI is 2.1 and 17.9.
The Foreign Investment Promotion Board (FIPB) is the nodal, single window agency for all matters relating to FDI as well as promoting investment into India. The Secretarial for Industrial Assistance (SIA) is gateway to industrial investment in India. It was set up by the Government of India to provide a Single Window for Entrepreneurial Assistance, investor facilitation, processing all applications which require government approval.
------
** Source: Economic Times, August 16, 2005 and The McKinsey Quarterly, Indian economy updates, September 2005
SIA functions through its specialized divisions such as Foreign Investment Promotion Board (FIPB), Foreign Investment Promotion council (FIPC) and Foreign Investment Implementation Authority (FIIA).Table.1 shows some of the major initiatives to attract FDI during 2002-03
TABLE- 1 FDI APPROVALS MADE IN THE RECENT PASTActual inflow of FDI / 1995 / 1996 / 1997 / 1998 / 1999 / 2000 / 2001 / 2002
(April)
Government's Approval / 38.7 / 57.6 / 101.3 / 82.4 / 61.9 / 63.4 / 96.4 / 32.9
RBI Automatic Approval / 5.3 / 6.2 / 8.7 / 6.1 / 7.6 / 17 / 32.4 / 12.6
NRI Schemes / 19.7 / 20.6 / 10.4 / 3.6 / 3.5 / 3.5 / 2.3 / 0.1
Total / 63.7 / 84.4 / 120.4 / 92.1 / 73 / 83.9 / 131.1 / 45.6
Source: RBI Annual Report, 2004
Foreign Direct Investment (FDI) has a direct impact on output growth in India as it augments the available investable capital. FDI serves to increase competition in markets, bring new technology into India and faster skill acquisition among domestic labour.FDI flows remained subdued during 2003-04 in line with the slowing down of FDI flows to the developing countries in general (Table.2)
TABLE- 2 FOREIGN INVESTMENT FLOWS TO INDIA(US $ million)
2004-05(P) / 2003-04 / 2002-03
A. / Direct Investment in India (I+II+III) / 5536 / 4673 / 5035
I. / Equity / 3363 / 2,387 / 2,764
II. / Re-invested earnings# / 1816 / 1,798 / 1833
III. / Other capital * / 357 / 488 / 438
B. / Portfolio Investment
(a+b+c) / 8,909 / 11,377 / 979
a) / GDRs / ADRs / 613 / 459 / 600
b) / FIIs+ / 8280 / 10,918 / 377
c) / Off-shore funds and others / 16 / -- / 2
C. / Total (A+B) / 14,445 / 16,050 / 6,014
P-Provisional figure, - -negligible
# Relates to acquisition of shares of Indian companies b non resident Indians under section 6 of FEMA, 1999
* Data related to inter company debt transactions of FDI entities
+ Net inflow of funds by FIIs
Source: RBI Annual Report, 2005
Foreign Institutional Investors (FIIs), the lynchpin of Indian stock markets, have emerged as the second biggest block of investors in leading domestic companies with a share much higher than that of the local financial institutions. FII investments in Indian equities have crossed $8 billion in 2004 which is $1400 million more in 2003. Data on share holding pattern collated till the end of June, 2004 shows that FIIs hold about 13.9% of the market capitalization of 394 BSE 500 companies worth $222 billion. Promoters of these companies owned about 53.8% while the public holds about 14.9%. The ownership patterns are significant as it shows that FIIs are now the 2nd largest owners of Indian companies behind promoters. About 7 leading Indian companies have foreign ownership worth more than $ 1 billion. Infosys Technologies leads the pack with about $ 3.8 billion followed by Reliance Industries at $ 3.7 billion, ICICI Bank at about $ 2.7 billion and HDFC at $ 1.7 billion.
A strong performance by the domestic corporate sector in India has clearly emerged as one of the significant driving forces of FII investment in the domestic capital market. A turnaround in the fortunes of several cyclical industries such as auto, steel, aluminium, shipping and hospitality has seen strong performances coming in from the companies of these sectors. With the developed economies like US, Europe and Japan grappling with lower than expected growth and also with dollar losing its hold, emerging markets like India and China are being seen as attractive destinations for FIIs’ money
Important factors like slow nominal GDP growth, deflation, the US current account deficit and continued historically high stock valuations in developed markets as key concerns to global investors. In comparison, emerging markets are currently trading at a significant discount to developed markets and their currencies are now very competitive withy many having gone through painful devaluations. According to US based Emerging Portfolio Fund Research, on the basis of net purchases by foreign funds, India ranks fifth after Taiwan, China, Korea and South Africa
2.0 RISING EXPORTS
Perhaps the most critical feature of fast growing economies has been the rapid rise of manufacturing /service exports. This has been supported by trade policies that have allowed manufacturing/service exporters to operative at (nearly) world prices, both for inputs of capital and intermediate goods/services, and for the sale on world markets. All fast growing economies, for example, avoid trade policies that undermine the capacity of manufacturing/service exporters to obtain necessary inputs at world prices, or that penalize exporters through heavy taxation.
India successfully crossed 95.240 billion USD in 2000-01, then to 185.5 billion USD in 2004-04 in foreign trade transactions. India has achieved 4.74 times growth in foreign trade transaction during 14 years of its trade liberalization. .The Indian success Story, in terms of rising exports of services and engineering, auto, auto components and generic pharmaceuticals are on track .Mid term appraisal of Indian economy in October 2005 by RBI shows a positive growth of 6.5%, BSE Sensex touched the highest score of 8,600 and FIIs investment in India registered a record high of $ 8 billion.
2.1 Liberalization holds the key
The experience of rapidly growing developing countries demonstrates that protectionism only perpetuates inefficiencies and stagnation. Recent World Bank studies show that developing countries that have embraced open market strategies in the past decade have grown much faster than those that have not.
A country like India where forex reserve in 1991 was only 7% of external doubt (US$ 120 billion) and globalization brought US $145 billion forex to the country’s reserve with in 14 years which changed the country’s position from a debtor to donor in IMF. In October 2005, India’s forex reserve, according to reserve bank of India (RBI), exceeded its foreign debt by US$ 16.2 billion despite a sharp expansion of external commercial borrowing of US$27 billion. Further India’s export is growing at 20% for three consecutive years Investment averaged 26% of GDP in the early 2000s crossing 30% of GDP and also crossing savings rate in 2005. It is estimated the current account deficit of US$ 47 billion (nearly 6% of GDP) in 2005 as against a surplus of US$10,561 in 2003-04 In general, Asian economies are registering well above 6% in 2005-06.
The Bombay Stock Exchange Sensex rose from 7000 to 8000 level in 55 days flat since July 20, 2005. In comparison it took more than 500 days for the Sensex to rise by the same distance from the 6000 marks that it crosses in January 2004. Worse still, it took nearly 5 long years to climb back to 6000 level after it first breached that barrier in February 2000.
2.2 India moving towards service economy
Economic development is, characterised by an increase of the share of the services in the GDP and total employment. This trend tends to increase the international trade in services. Many of the fastest growing sectors are services (Telecommunications, Health care, Finance and Software developments).The share of services in world trade and investment has been increasing. Following global trend India also witnessed a boom in service exports in the recent years.
An upward shift in the trend growth of services exports from 7.9 per cent in the first half of the 1990s to 15.3 per cent in the period from 2000-01 to 2003-04 reflected a distinct strengthening along with greater stability. The coefficient of variation of services exports, which increased from 12.0 per cent in the first half of the 1990s to 34.7 per cent in the second half of 1990s(Table-3)
TABLE-3 PROFILE OF INDIA’S SERVICES EXPORTS(Per cent of total services exports)
Year / Travel / Transportation / Insurance / G.N.I.E. / Software / Miscellaneous*
1990-91 / 32.0 / 21.6 / 2.4 / 0.3 / 0.0 / 43.7
1995-96 / 36.9 / 27.4 / 2.4 / 0.2 / 10.2 / 22.9
2000-01 / 16.8 / 10.1 / 1.4 / 3.5 / 33.6 / 34.6
2001-02 / 14.1 / 9.5 / 1.3 / 2.3 / 36.6 / 36.3
2002-03 / 12.1 / 10.1 / 1.5 / 1.2 / 38.5 / 36.6
2003-04 / 14.3 / 11.6 / 1.5 / 0.9 / 44.2 / 27.5
*: Miscellaneous services excluding software.
Note: G.N.I.E: Government Not Included Elsewhere.
Source: RBI Annual Report 2005